India Insight

Diesel strategy: merely old wine in new bottle?

June 7, 2012

Planning to buy a car? Seeing petrol prices head northwards, chances are high you would have changed your mind and now intend to buy a diesel-powered vehicle. That might be a smart move given the government’s reluctance to tinker with diesel prices in the face of stiff opposition. But there are plans afoot to deter you.

After considering raising diesel prices at one point, the government is now mulling a proposal of higher duty on diesel vehicles and even thinking of increasing diesel prices only for cars and sports utility vehicles (SUVs) — something that has been debated earlier.

The aim of these alternate proposals is simple — to reduce the consumption of diesel in India which would ease the strain on the government’s finances, and stop wealthy SUV owners from reaping the benefits of state subsidies.

But even if implemented, it is not easy to solve the core issues using these solutions.

Automobile manufacturers had successfully lobbied against an 80,000-rupee duty hike on diesel vehicles in 2010. Finance Minister Pranab Mukherjee is currently studying the new proposal of higher duty on diesel vehicles.

The proposal doesn’t mention the duty hike being considered, but an official present at one of the government meetings explained that even a 5 percent duty will yield only 20-25 billion rupees in additional revenue. Given diesel subsidies stand at around 1 trillion rupees, such a meagre amount won’t help much.

Moreover, if implemented, such a proposal will hurt India’s auto industry, which has spent millions of rupees in recent years ramping up diesel engine technology after seeing a rise in demand for such vehicles. This will not bode well for the already struggling economy.

Also, some car buyers might not change their decision if an extra, say 5 percent, duty is imposed on diesel cars. For instance, a businessman planning for long-term logistical needs would still prefer diesel as petrol is around 70 percent more expensive.

So it’s still unclear whether a duty hike will help improve the health of India’s economy.

Dual pricing of diesel will have its own share of problems and can lead to market abuse. If the pricing difference for commercial vehicles and passenger vehicles is significant, it could encourage bribery.

In October, Oil Minister Jaipal Reddy had ruled out any such pricing mechanism. Perhaps the current economic condition is forcing the government to come up with any solution to help ease the subsidy burden.

But piecemeal proposals will not do much to solve the core problems faced by the economy. While decontrolling diesel prices remains the long-term solution, the government should learn from the recent petrol price hike episode in which oil marketing companies were forced to partially roll back prices after raising them by around 7.5 rupees per litre.

Diesel prices were last revised in July 2011 and a litre of diesel currently sells for 40.91 rupees in New Delhi. This still results in a revenue loss of 12.53 rupees per litre for oil marketing companies. Instead of revisiting older proposals which are hard to implement, baby steps can be taken and diesel prices can be revised slowly, before being decontrolled.

A hike of say 3 rupees would make for less depressing newspaper headlines and might be easier to stomach than a 7-rupee hike shocker or a decision of complete decontrol at this stage.

(Follow Aditya Kalra on Twitter @adityayk )

Comments
2 comments so far | RSS Comments RSS

The government proposal for a higher duty on diesel vehicles is just a knee jerk reaction. As rightly said since petrol is 70% more expensive, it still makes sense to buy diesel car, even if it would cost 80,000 rupees more. The duties won’t change structural flaws in fuel pricing policy.

Posted by sharmarakesh | Report as abusive
 

The policy of the govt vis-a-vis regulation of oil pricing in India serves nothing but ‘adding fuel to the fire’.

Posted by AdadaAds | Report as abusive
 

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